Health care providers often need specialized medical or dental equipment to treat their patients. But the crucial machines can come with a hefty price tag that’s hard for health care practices to pay upfront.
One possible solution is medical equipment financing. Health care practices can pay for equipment via secured loans, potentially helping them manage cash flow better and preserving working capital.
Key Points
• Medical equipment financing preserves cash for businesses by allowing them to acquire necessary equipment without upfront payment.
• Financing terms for medical equipment typically range from 5 to 15 years, depending on the equipment’s useful life.
• Leasing equipment can be a good option for short-term needs or frequent upgrades.
• Tax benefits are available for financing medical equipment, allowing deductions in the year the equipment is put into service.
What Is Medical Equipment Financing?
Medical equipment frequently commands eye-popping prices. A PET/CT scanner, for instance, can start at about $225,000 and cost as much as $750,000 for top-of-the-line models. Paying for expensive equipment with cash could easily drain a business’s cash reserves, leaving it with little working capital and perhaps without a cushion for emergency expenses.
Medical equipment financing companies can help with this situation. Lenders offer borrowers a secured small business loan — generally set up as a traditional term loan — with the machinery itself serving as collateral. Rates and loan terms will vary.
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How Medical Equipment Financing Works
Health care equipment financing provides a lump sum of money to a medical or dental practice so it can upgrade or purchase the machinery it needs for tending to patients. The loan spreads out payments over a term of several years, allowing the practice to protect its cash reserves.
Banks and other traditional lenders can be sources of equipment loans, as can medical equipment financing companies and vendors.
Benefits of Medical Equipment Financing
Health care equipment financing can be a way for medical and dental practices to access machinery and devices that would otherwise be out of reach. Having the most up-to-date equipment may enable practices to deliver even better patient care.
From a financial perspective, one major benefit of a medical equipment loan (as mentioned above) is that it preserves cash for the business. The practice can then use its existing funds for other needs.
Also, the predictable expense of fixed monthly loan payments can be convenient for budgeting. If the business’s cash flow is unpredictable, lenders may offer flexible repayment terms instead. One example is revenue-based financing, in which borrowers repay a loan based on business income rather than with fixed monthly payments.
Businesses with less-than-great credit may get better interest rates and terms on secured equipment financing than on unsecured loans. This is because the collateral generally lessens the lender’s risk. If a borrower fails to repay on time, the lender can seize the equipment to recoup their losses.
Finally, if the loan repayment helps improve the business’s credit score, future borrowing is likely to be easier and less expensive.
Common Uses for Medical Equipment Financing
Medical equipment financing can be used for a number of purposes.
We’ve already touched on purchasing new equipment. With health care equipment finance agreements, a practice could buy diagnostic tools, surgical equipment, x-ray units, ultrasound systems, dental chairs, and other high-priced machines. Getting new equipment can help practices upgrade or expand their services to provide the best care possible.
Equipment financing proceeds can also be used to repair devices or machinery that the practice already owns.
Businesses sometimes use equipment loan money on purchases that aren’t medical tools per se. Part of the lump sum loan could be used for office management software and IT to run a practice. Other possible purchases might include office furniture, copiers, or cabinetry.
Alternatives to Medical Equipment Loans
One important alternative to equipment financing is equipment leasing. An operating lease is basically a rental agreement. In exchange for using equipment owned by someone else, you agree to make regular monthly payments over a set period known as the lease term.
When the lease ends you typically have three options. You could decide to renew the lease, or you might decide you no longer need the equipment, or you might want to upgrade to something newer.
If you made an arrangement known as a finance lease or capital lease, you’ll generally have the option to buy the equipment at the end of the lease term.
When deciding between leasing vs purchasing equipment, consider the equipment’s useful life and what you’ll use it for. Leasing may be a good option if you expect to need a piece of machinery for only a brief time or you want to be able to upgrade the item easily and frequently.
A business line of credit may be an option for some equipment purchases. A line of credit is a form of revolving credit. It allows you to borrow up to a certain limit; you will owe interest on the amount you withdraw until you pay it back. Whatever money you pay back during the draw period becomes available to you to borrow again. Once the draw period ends, though, the lender generally expects the outstanding balance to be repaid in accordance with the credit agreement.
Because lines of credit typically charge higher interest rates than equipment loans, they are a more expensive form of capital. To manage the money wisely, it’s worth figuring out how soon you’ll be able to pay off the balance.
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How to Qualify for Health Care Equipment Financing
Your eligibility for medical equipment loans will typically depend on multiple factors. Lenders will want to see several kinds of information about your business, including:
• Good credit history and cash flow. Lenders usually prefer borrowers who have a history of paying debts on time, who don’t carry too much debt at once, and who have enough revenue to cover debt payments along with the business’s operating costs.
• Tax and financial statements. These give lenders a clearer look at your practice’s financial health over time.
• A business plan. This should clearly describe the practice’s operations, market, revenue, and costs. It should also detail the ways you expect the new piece of medical equipment to have a positive impact on the business.
Some lenders may ask that you make a down payment, which helps further decrease their risk, even when the equipment itself is serving as collateral for the loan.
Tips for Choosing the Right Financing Option
If you want equipment financing, it pays to shop around. Compare several health care equipment finance offers, looking closely at interest rates, fees, and terms. Ask for clarification of loan conditions, including provisions like prepayment penalties. And be sure that the repayment schedule aligns with your cash flow.
The Takeaway
Medical equipment financing commonly takes the form of secured loans, collateralized with the equipment itself. Financing can improve a health care practice’s access to updated equipment while preserving the practice’s cash flow. Equipment leasing and business lines of credit are possible alternatives.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
Can I finance used medical equipment?
You can use an equipment loan to finance used medical equipment. However, interest rates may be higher and loan terms may be shorter than for new equipment. The rationale is that used equipment could have a reduced lifespan and higher likelihood of damage.
What credit score is needed for medical equipment financing?
Applicants with credit scores above 650 are more likely to get medical equipment loans. Borrowers with lower scores may be able to find lenders who will work with them. Note that lenders may charge higher interest rates and more fees to borrowers with lower credit scores.
How long can I finance medical equipment for?
Medical equipment typically has a useful life of between five and 15 years, depending on its type and function. As a result, financing terms are typically 10 years or less.
Is leasing better than financing medical equipment?
Leasing is not necessarily better than financing; it depends on the equipment. For expensive items that are likely to need frequent upgrades, it may be a worthwhile option.
Are there tax benefits to financing medical equipment?
Yes, there can be tax benefits for financing medical equipment. For certain equipment types, the IRS allows you to deduct the entire purchase price (subject to phase-out provisions) in the year the machinery is put into service. This is allowed even if the purchase was financed — but the deduction amount can’t exceed the net taxable income from all your business activities.
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